There is a contingent of analysts and economists who stand in the way of progress in economic and financial understanding of how stock markets work. One prevailing view is that the rise of interest rates is followed by a decline in the stock market. Worse still, there is the belief that reducing interest rates is the Federal Reserve’s primary tool for dealing with slowing economic growth.
Below, we show how, in spite of a cyclical increase of the Federal Reserve’s discount rate, from early 1925 to mid-1929, the stock market defied modern analysts and economists claims.
In the period from 1925 to 1929, the Federal Reserve embarked in a policy of increasing the discount rate. Below is the performance of the Dow Jones Industrial Average and Dow Jones Transportation Average in the period from 1925 to 1929.
As we all know, the period that followed the peak in stock market in 1929 was declining interest rates and a subsequent stock market decline of nearly –90%.
Were we biased in our selection of the data? Absolutely! We chose the cyclical (short-term) period for one of the most notorious stock market rises and declines and added the cyclical period of rising interest rates to prove a point.
However, if you want to see how the stock market did during a secular (long-term) period of rising interest rates then see our posting titled “The False Narrative of Stocks and Interest Rates” published on January 7, 2019.
sources:
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A.C. Miller. “Responsibility for Federal Reserve Policies: 1927-1929”. The American Economic Review. September 1935. pages 442-458. accessed 2/10/2019. JSTOR
